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Tunisia’s political transition made steady progress in 2014, overcoming political deadlock to adopt a new constitution, and holding both parliamentary and presidential elections. The national dialogue platform, brokered by key civil society organizations, played a crucial role in building consensus.

Overview

Tunisia’s political transition made steady progress in 2014, overcoming political deadlock to adopt a new constitution, and holding both parliamentary and presidential elections. The national dialogue platform, brokered by key civil society organizations, played a crucial role in building consensus among all major political parties. This resulted in the adoption of a consensual roadmap that paved the way for the elections which took place peacefully at the end of 2014. The political transition concluded in 2015 with a new government beginning a five-year term and taking the lead in meeting Tunisia’s security and economic challenges.

Macro-economic

Economic activity has been slow in the post-revolutionary period, as real GDP grew at 2.3 percent only in 2014, after 2.4 percent in 2013. IMF and World Bank estimate growth rate for 2015 to 1%. The recovery in external demand has been largely absent, reflecting developments in the European Union, while the domestic demand is increasingly affected by tighter macroeconomic policies. The social tensions that marked the first half of 2015, as well as the combined effect of the two dramatic terrorist attacks of the Bardo Museum and the Sousse holiday resort further negatively affected activity in the first half of 2015. This has led the economy into two consecutive quarters of negative quarter-on-quarter growth (-0.2 percent and -0.7 percent). This deterioration is also attributable to production declines in mining (social tensions in the phosphate sector), oil and gas, and commercial services (mainly tourism and transport). Reflecting the slowdown in activity, CPI inflation had eased towards 4 percent in the summer of 2015. Unemployment has slightly increased in 2015, to 15.2 percent, despite a minor decline in graduate unemployment (from 20.8 to 19.9).

While 2014 saw an improvement in the budget deficit to 4.1 percent of GDP (from 6.2 percent in 2013), due to lower spending on subsidies and relatively strong revenue collection, the fiscal stance will temporarily depart from its consolidation path due to the impact of the economic slowdown and the fiscal response to the security shock. The bulk of the consolidation came from lower capital expenditure (4.2 percent of GDP). On the current spending front, the wage bill continues to run at high levels (12.7 percent of GDP in 2014), while subsidies and transfers are declining for the first time since the revolution. Resources to rescue the tourism sector and stimulate investment in other sectors, as well as the implementation of the recapitalization of public banks will also affect the budget deficit, expected to reach 6.3 percent (excluding grants).

The marked current account deterioration of 2014 (8.8 percent of GDP), caused by a widening merchandise trade deficit, has only been marginally reversed in the first half of 2015, as the improvement in the trade balance has been largely offset by a reduction of the service balance surplus. Foreign reserves are stable at relatively low levels (around US$6.6 bn., covering just under three months of imports of goods and services). The Central Bank of Tunisia has implemented a tighter monetary policy since mid-2012 to rein in inflation, but in the context of the current slowdown, it is likely to delay further increases in the policy rate and closely monitor the objective of maintaining inflation below 6 percent. The exchange rate depreciated gradually over 2014 (-15 percent vs. the US dollar and -5 percent vs. the Euro) and part of 2015. Foreign exchange interventions have been increasingly limited in order to preserve the level of reserves.

Poverty

There are no official statistics on the incidence of poverty after 2010. Bank staff projections suggest that poverty incidence declined from 7.6 percent in 2013 to 7.1 percent in 2015 using the 2011 PPP US$ 3.1 poverty line. This decline reflects the capacity of the social protection system to protect consumption to some extent and the increasing control over inflation. On the negative side, serious production and turnover setbacks in mining, parts of agriculture production (cereals) and labor intensive services (tourism) should adversely affect living conditions in rural areas, where poverty is concentrated, as well as some urban poverty pockets where employment prospects are deteriorating. Tunisia’s political transition made steady progress in 2014, overcoming political deadlock to adopt a new constitution, and holding both parliamentary and presidential elections. The national dialogue platform, brokered by key civil society organizations, played a crucial role in building consensus among all major political parties. This resulted in the adoption of a consensual roadmap that paved the way for the general elections which took place peacefully at the end of 2014. The political transition concluded in 2015 with a new government beginning a five-year term and taking the lead in meeting Tunisia’s security and economic challenges.

After a short-lived rebound in 2012, the increasing political and social instability, as well as the difficult external environment, that characterized most of 2013-2014, had led to a slowdown of economic growth. Rebounding from the contraction of 1.9% of GDP in 2011, the economy grew by 3.6% in 2012, slowed down to 2.6% in 2013 and the Bank estimates that for 2014 growth will remain modest at 2.2%. Unemployment remains at 15.3% from 16.7% in 2011, but still well above the pre-revolution level of 13%.

Post-revolutionary governments have pursued expansionary fiscal and monetary policies until 2013 to support the economy and employment. The government had a deficit target of 5.1% of GDP in 2014 which will be missed as fiscal revenues were restrained by subdued growth, both domestically and in the country's main trading partners in Europe. For 2013, the deficit has reached 6% and should remain at that level in 2014. A tightening of monetary policies as well as more moderate commodity prices have allowed for a slowdown in consumer price inflation, which slowed down to 5.5% in February 2014, after reaching 6.3% one year earlier.

The external current account deficit remained large for most of 2013 and is estimated to have increased to 9.4% of GDP. The trade balance deficit widened from 10.3% of GDP in 2011 to 13.4% in 2012. The impact of the trade and income deficits on the current account will be partly offset by a surplus in services; the number of tourists visiting Tunisia is forecast to rise after the slump caused by the revolution in 2011, but growth continues to reflect weakness in European demand. Following a rebound in 2012, Foreign Direct Investment (FD) declined in 2013, in the context of persistent political uncertainty, and foreign exchange reserves have gradually declined until end 2013. Net FDI flows are therefore estimated to have declined to US$1.0 billion, compared to the US$1.7 billion reached in 2012. Some limited foreign exchange interventions continued in 2013, as pressures on the currency mounted. A persistently wide current account imbalance and lower than expected capital inflows have led to a reduction of reserves to about US$6.8 billion by end-2013 (or just equivalent to 3 months of imports of goods and services). Supported by only limited interventions of the Central Bank, the exchange rate has depreciated by about 11% vis-à-vis the Euro in 2013. In early 2014, both reserves and the currency recovered somewhat, on account of increased confidence after the resolution of the country’s political crisis.

Last Updated: Sep 30, 2015

An Interim Strategy Note (ISN) for Tunisia covering Fiscal Year (FY) 2013-14 was endorsed by the World Bank’s Board of Directors in early July 2012. The ISN outlines a World Bank Group program focused on contributing to the Constituent Assembly Government’s short and medium-term employment creation objective. The program aims at promoting private-sector led recovery and job creation, with a focus on openness, opportunity and accountability. The World Bank Group is now in the process of preparing the FY16-FY20 joint World Bank-IFC-MIGA Country Partnership Framework (CPF), to be submitted to the Board this FY to support Tunisia’s 2016-2020 Development Plan of which a detailed outline was recently completed. This National Development plan is articulated around an overarching objective of good governance as a basis for reforms implementation with the following four development axes: (i) establishing a higher value-added economy; (ii) ensuring human development and social inclusion; (iii) increased responsiveness to regional needs; and (iv) ensuring sustainable development and green growth. The CPF will be prepared based on discussions with the Government and other stakeholders in Tunisia, and on the FY15 Systematic Country Diagnostic’s recommendations.

Key lending operations under the ISN include a series of Governance, Opportunity and Jobs Development Policy Loans (GOJ DPL). The first DPL for US$500 million was approved by the World Bank Board of Directors in November 2012. The second DPL for US$250 million was approved on April 29, 2014, and the third DPL for US$500 million was recently approved by the Board on October 1, 2015. These three single-tranche operations were intended to support the government in completing the transition, while stabilizing the macroeconomic and financial situation and carrying out selective reforms to accelerate economic recovery by instituting fundamentals needed to develop a competitive economy. The African Development Bank and the European Union are key Bank partners and provide parallel budget support for other GOT reforms.

The ISN also includes multiple investment operations. An MSME Financing Facility (credit line) was approved in July 2011 which disbursed within two years and thus an additional financing of US$100 million was approved in FY14. A Transport Sector Operation totaling $200 million was approved by the Board in July 2015, and an Education for Employment Operation $70 million will be presented to the Board by end 2015. Focus is also on more coordinated implementation of operations in lagging regions and a drive for timely results of the $300 million program for results Local Governance and Municipal Development Project. This operation would pave the way to support innovative mechanisms to finance local government activities that are responsive to citizens’ needs. The remainder of the Bank’s ongoing portfolio includes operations to support access to water and sanitation, energy efficiency, community driven development (CDD) operations. As of September 2015, the portfolio is at historical highs in terms of commitments and includes IBRD lending commitments of US$921 million, IFC commitments of $188 million and one MIGA guarantee for $108 million. The IBRD portfolio is composed of one Program for Results (P4R) operation mentioned above for local governance and municipal development and 9 Sector Investment Loans (SILs) totaling $621 million. The total undisbursed amount is $673 million which represents 74 percent of total commitments. There are also 12 grants totaling $51.5 million. These grants include Global Environment Facility resources for infrastructure, waste management, and natural resources management, three Japanese Social and Development Funds (JSDF), a State and Peace building Fund (SPF) and a Multi-Donor Trust Fund. One of the JSDF grants is a youth employment and training activity being implemented in remote areas.

IFC’s approach in Tunisia emphasizes inclusion and focuses on job creation through increased private sector investments in key sectors. IFC will focus on improving the business environment to help send a strong signal to private investors that Tunisia is once again open for business. It will also expand access to finance to MSMEs – through (1) strengthened business and trade and competitiveness environment; (2) improved access to finance, especially for MSMEs, as well as address broader issues of financial inclusion and sector development; (3) improved youth employability; and (4) completed transformational infrastructure projects especially through instruments like PPPs. Moreover, IFC will invest in labor intensive and high value added sectors (i.e. IT, off-shoring, agribusiness, electronics, electrical and mechanical industries) and improve infrastructure and social services especially in lagging regions.

Following the 2011 revolution, GOT sought out WBG for its convening power in terms of leveraging additional financial resources from donors through joint budget support operations, global knowledge in economic reforms in post-revolution countries, and technical assistance.

On the decentralization agenda: Tunisia’s new Constitution radically changes the governance structure of the country and promotes a decentralized form of government, where decisions should be taken at the lowest level possible. The Municipal Development Program is the WBG instrument that will support Government as it proceeds with the organization of municipal elections and the establishment of municipal councils. The Municipal Development Project promoted the establishment of a LG capital grant system based on a transparent formula which annually transfers predictable levels of funding directly to the municipalities while in tandem ensuring citizen participation in the decision making process (e.g. for municipal investments, planning, etc.). In addition, a transparent (web-based) information disclosure system is being put in place to provide information on all aspects of the grant transfer and performance assessment system.

In ICT: Tunisia completed in June 2014 the consultative process to adopt its new ICT strategy called “Digital Tunisia 2018” which aims at transforming the country into an international digital best practice and to use ICT as a key accelerator of social and economic development. The financing request from the Government to support the implementation of this ICT strategy was sent on March 25, 2015 and an identification mission will visit Tunisia in October 2015. Support to the ICT sector will be done using, to the maximum extent, private sector involvement. WBG financing is also likely to leverage additional donor funds.

On Transparency and Accountability: The 2011 Governance and Opportunity (GO DPL) has led to increased public access to economic and social data and public finances: the Ministry of Finance now publishes monthly data on budget execution; the annual reports of the Supreme Audit Institution are published online; the Statistical Office has introduced on-line access to key survey databases (Household Budget Survey 2005; Labor Force Survey 2010; a sample of the Population Census 2004). Under a Freedom of Association Law passed in 2011, non-governmental organizations, think-tanks and other groups can now easily gather together, which led to the creation of a very large number of CSOs throughout the country. The Tunisian government issued a decision to publish key information on public finances, with citizens’ budget and an online open budget platform was created to further promote the transparency of public finances. A participatory regulatory simplification process in the Ministry of Finance was established which reduced red tape by simplifying procedures by 86 percent and eliminated 7% of customs & tax procedures. A broader regulatory simplification reform has been launched in 9 ministries.

In the Banking sector: Further to the implementation of organizational changes in three State-owned Banks (SOBs), coupled with the stronger regulatory requirements, the governance of state owned banks has improved and the banking sector is being restructured to operate along international norms. The competitive selection of the CEOs of the three SOBs should be completed by end October 2015 and endorsed by the SOBs new Boards.

In the social sectors: In the education sector, the National Authority for the Evaluation, Quality Assurance and Accreditation of higher education was established. The Bank is preparing an operation to improve the content and quality of tertiary education with a view to improve the employability of university graduates through a competitive grant funding mechanism for higher education institutions. The government with WBG support is aiming at rationalizing its safety net programs and improving its targeting mechanisms. In this context, the GOT is designing a “unique identifier mechanism” that would be used to target all safety net programs. This would help to avoid duplication of benefits and to assess benefit levels and priorities based on transparent needs used through a proxy means test approach.